No Down Payment? Chinese City Releases Bold Plan to Woo Home Buyers – Then Quickly Backtracks

An aerial view shows the city skyline of Shenyang, Liaoning province, China, October 18, 2015.

Reuters

A Chinese city has unveiled an unorthodox plan to ease its property glut – but the proposal may be a bit too bold for the higher authorities’ liking.

This week, the city of Shenyang in northeast China grabbed eyeballs by suggesting that it plans to expand its pool of home buyers by removing the down payment requirement for fresh college graduates.

Social media in China were abuzz after the official Xinhua News Agency published a report Tuesday on the proposal,which also seeks to entice recent graduates with a 200 yuan ($30) per-square-meter and a deed tax waiver. Social media users hailed the plan as an attractive one but also said it also indicates how desperate Shenyang is in its quest to lower its huge inventory of apartments.

The Xinhua report was taken down on Wednesday, and the Shenyang government said in a statement that the incentives for graduates “were still in preliminary stages of discussion.”

Zero-down payment raises the risk that home buyers who may not be creditworthy might create a bigger mess, similar to the careless lending practices in the U.S. during the credit bubble in the past decade.

This is not the first time local governments’ efforts to juice their property markets have compelled them to propose loosening measures, only to make a U-turn the following day. In 2011, Foshan in Guangdong province backpedaled on its modest rollback on home purchase curbs within hours.

This indicates that while cities are being given more autonomy to support their housing markets amid China’s economic slowdown, they don’t have entirely free rein — no matter how dire the supply glut is.

According to the Xinhua report, the proposed “zero-down payment policy” would be offered only to people who have graduated from college or vocational school within the past five years. Applicants must also have contributed to the city’s housing provident fund for at least three months, down from the usual six months, and can apply for loans of up to 800,000 yuan ($122,000).

The plan is one of 22 incentives that are focused on “driving the healthy development of the property market,” the proposal said.

The Beijing News in a commentary Wednesday said the “zero down payment” policy was “inappropriate” in the current already highly-leveraged property environment. “The policy would wrongly drive excessive consumption among students, and that itself has some irresponsible component,” the paper said.

Shenyang — the capital of Liaoning province, which borders North Korea – is one of the Chinese cities worst plagued by overbuilding.

As of January, Shenyang’s housing inventory level was at 20.4 months, down from the 26.7 recorded in January 2015 but still far from a healthy rate of 12 months or below. According to official data, average home prices in Shenyang fell 0.5% in January from a year earlier, underperforming Harbin (+0.1%), another northeast Chinese city, as well as other second-tier cities along China’s coast.

To be sure, Shenyang isn’t just limiting itself to attracting graduates to help mop up its rows of apartments. It is offering other first time home buyers applying for mortgages from the local housing provident fund a 10% down payment requirement, as opposed to the minimum 20% down payment rate that commercial banks have to charge.

The city is also granting rural households a 100 yuan per square meter “settling down” subsidy and says it is looking to develop a system to compensate these households for forgoing their rights to rural land. It isn’t clear whether these steps are similarly in “preliminary stages” of discussion.

“Rural households wouldn’t buy a property in the city just because of the subsidy, though it’s a nice-to-have. For the local governments, they can get tax revenues from business tax, land appreciation tax, and corporate income tax from the transactions,” said Jennifer Weng, Shanghai-based Tax Partner at KPMG. The local governments get at least 6% of the price of the home in tax revenues when a home buyer signs a pre-sale agreement with the developer, she added.

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